Consumer Protection Agency in Doubt

Dodd Weighs Dropping Idea of Creating Independent Body in Bid to Get Financial Regulatory Revamp Passed This Year

By

Damian Paletta

Updated Jan. 15, 2010 12:01 a.m. ET

Senate Banking Committee Chairman Christopher Dodd is considering scrapping the idea of creating a Consumer Financial Protection Agency, people familiar with the matter said, an initiative at the heart of the White House's proposal to revamp financial-sector regulations.

The Connecticut Democrat, who announced this month that he wouldn't run for re-election this year, has discussed the possibility of abandoning the push for a new agency during negotiations with key Senate Republicans as a way to secure a bipartisan deal on the legislation, these people said.

Mr. Dodd's offer is conditional, however: Republicans must agree to create a beefed-up consumer-protection division within another federal agency, these people said.

The apparent willingness to forgo an independent consumer-protection agency would be a major concession for Mr. Dodd, who had blasted the banking industry for lobbying aggressively to prevent the creation of such an entity. "The very people who created the damn mess are the ones now arguing that consumers ought not to be protected," he said in June.

Mr. Dodd's shift comes amid a new sense of urgency to enact revamped rules governing the financial sector in what is now a narrow window before the November election.

His ability to dictate terms has been lessened by his decision to not seek re-election ... just go slowly out to pasture with a bit of dignity.

—Eric Nelson

Bipartisan support is believed necessary to pass such legislation, as Democrats aren't likely to get the 60 Senate votes needed to overcome a potential Republican filibuster. With Mr. Dodd no longer seeking re-election, some of the pressure to apply a populist stamp on new financial regulations has eased.

Mr. Dodd's openness brings him more in line with the top Republican on the Senate banking panel, Richard Shelby of Alabama, who has referred to the Consumer Financial Protection Agency as a "nanny state."

Many in Washington and on Wall Street believe the chances of Congress reaching an agreement on financial regulations hinges on whether Messrs. Dodd and Shelby can work out a compromise, and staffs have been locked in intense negotiations for weeks.

Representatives of Messrs. Dodd and Shelby wouldn't discuss the state of negotiations, other than to say no agreement has been reached.

Talks could fall apart, and Mr. Dodd could still decide to push for creation of an independent agency.

Dropping the bid for a standalone consumer-protection agency would strip out a central plank of the White House's proposal and could infuriate liberals and consumer groups who have championed the idea. It could also breathe life into an effort to get a compromise on new financial regulations, assuming liberal Democrats don't break ranks.

White House and Treasury Department officials have so far remained committed to creating a standalone agency. "There needs to be a new agency with new powers for whom this will be a primary mission," said White House National Economic Council Director Lawrence Summers.

Alternatives to the agency include a new division within the Treasury that would draft consumer rules, and a consumer-protection division run by a new federal bank regulator. The head of this division could be appointed by the White House, giving it more autonomy, people familiar with the matter said.

The CFPA was a main component of new financial regulations the Obama administration proposed in June, aiming to rewrite policies that administration officials argued had fueled the financial crisis by failing to protect consumers. The CFPA became a symbol of the legislation, and many Democrats saw it as a way to sell the financial regulatory overhaul to voters.

The CFPA proposal drew praise from Democrats, trade unions and consumer groups, but unleashed just as much opposition from many Republicans, business groups and banks.

In December, the House of Representatives voted on its version of the financial-regulation bill. The legislation included the creation of an independent CFPA, but its powers were watered down from the original White House proposal. It would primarily examine only the country's largest banks, but would be able to write rules that applied to any company offering financial products.

In addition to Republican opposition, several Democrats on Mr. Dodd's panel including Sens. Tim Johnson of South Dakota and Mark Warner of Virginia, have raised concerns about the way a CFPA would be constructed, warning about the potential it could either overburden small banks or pare access to credit.

The banking industry has spent months lobbying aggressively to defeat the creation of the CFPA.

"One of our principal objections all along is that you would have a terrible conflict on an ongoing basis between a separate consumer regulator and the safety and soundness regulator, with the bank constantly caught in the middle," said
Ed Yingling,
chief executive of the American Bankers Association trade group.

Consumer groups have lobbied hard for a federal agency whose only job is protecting consumers. "We need an independent regulator because the existing regulators have shown themselves to be incapable and unwilling of protecting consumers from abusive financial products," said
Travis Plunkett,
legislative director of the Consumer Federation of America.

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